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Major Low Coming Up For DD?

11/13/12 08:31:39 AM
by Donald W. Pendergast, Jr.

Down by more than 17% since September 21, 2012, shares of DuPont are likely getting close to completing a significant multicycle low.

Security:   DD
Position:   N/A

The autumn of 2012 has not been kind to a variety of large-cap stocks, with even big-tech names like Apple Inc. (AAPL) and Google (GOOG) trading well below their September-October 2012 highs. DuPont (DD) shares usually don't trend as well as either of those two issues, but even it appears to have a pretty strong tailwind pushing it toward even lower valuations.

As grim as DD's daily chart looks now (Figure 1), numerous price cycle studies are in agreement that the stock is likely to put in a multicycle low by the end of this week's trading action, followed soon thereafter by a tradable reversal higher. Here's a closer look now.

FIGURE 1: DD, DAILY. Four cycles, ranging from 10 to 80 days in length, are in strong agreement that DD will soon bottom and reverse higher. However, given the fact that the large bearish gap is still open and that long-term money flow remains poor, expect any initial rally off the lows to stall out well shy of the 47.00 to 48.00 area.
Graphic provided by: Sentient Trader.
DuPont shares can sometimes trend smoothly with low volatility and sometimes the best they can manage is to make a series of choppy, short- to medium-term trend moves, the kind that drive long-term trend-followers crazy. At present, the stock is trending steadily lower after enduring the recent (and violent) bearish gap of October 23, 2012. Normally, this is the kind of downward move that you would simply manage with something like a 10-bar trailing stop of the daily highs, counting on more downside for the stock's bearish continuation move in the days and weeks ahead, but when you take a look at DD's cycle studies, you realize that the stock has a good chance of bottoming by November 15, 2012, and at a price no lower than 39.94.

At least that's what DD's 10-, 20-, 40- and 80-day cycles are all in agreement about; the horizontal green shaded area on the chart shows just how closely all of those cycles agree that a bullish reversal is fast approaching. I've also checked on DD's long-term money flow and have determined that the bears are still in control of its longer-term trend. What this means is that although there is a 90% probability of DD bottoming by the end of this week, the probabilities strongly suggest that any rally higher isn't going to carry much farther than the bottom of October's bearish gap, which is at 46.62.

DD is going to need a bit of time before it can be expected to fully close the gap (the top of it is at 49.81), and the first strong rebound up from the expected low should finally begin to stall out by the final week of November 2012, with the bears being in prime position to drive the stock down once again. Just to be clear, until DD's open gap is finally closed and the long-term money flow (CMF)(100) is back above its zero line, don't expected to see a heroic bullish trend-following move in DD anytime soon.

FIGURE 2: PUTS. Selling the December '12 DD $40.00 puts looks like a high-probability option play, but only if the stock can make a daily close above the two downtrend lines depicted on the previous chart.
Graphic provided by: TradeStation.
Graphic provided by: OptionStation Pro.
Skilled put option sellers can put DD's anticipated reversal to good use. If you see DD break above both of the downsloping trendlines on the chart, that might be a prime time to start selling near-term, out-of-the-money put options on the stock. The December '12 DD $40.00 puts are going for about $0.41 ($41 per contract before commissions and slippage) as of this writing, and they feature a close bid-ask spread, daily time decay of $1.32 per contract and a delta of only (0.1842) (Figure 2).

Note that the $40.00 strike price is near the very bottom of the expected cycle low projection area (green box) and it's not likely to be hit before DD finally breaks above both trendlines mentioned earlier. All in all, this particular put sale looks like a fairly low-risk, speculative short-term profit play. If the option doubles in price (your actual sales price) or if DD declines below $41 -- whichever happens first -- just buy the put (s) back for a loss and wait for a better trade setup.

And if they decline in value by 50-60%, simply buy them back for a profit and smile. Be sure to risk no more than 2% of your account equity on this or another stock or option trade and make sure you stick to your trade management plan with no wavering or second-guessing. As always, please trade wisely until we meet here again.

Donald W. Pendergast, Jr.

Freelance financial markets writer and online publisher of the S&P 500 Weekly Forecast service.

Title: Market consultant and writer
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